Investing in Stocks by Hadi Rofiee

When you buy stock, you buy part of the corporation that issued the stock, or offered it for sale in an initial public offering (IPO). As a stockholder, you have equity, or ownership, in the corporation. From an Islamic legal perspective, this is lawful because you become a partner in the business.

Your equity is likely to be small. Most corporation issues millions or billions of shares. As an individual investor, you’re likely to own hundreds or thousands of those shares, equal to just a fraction of 1% the company. But your equity gives you the right to vote on some of the company’s policy decisions and for the board of directors. And you can profit if the stock’s price increases, if the company pays you dividends, or a portion of its profits, or if both of those things happen.[1]

I Want To Start Buying Stocks. Where Do I Start?

Investors or traders most commonly buy and trade stock through brokers. You can set up an account by depositing cash or stocks in a brokerage account.[2]

In Malaysia, you must first open a CDS[3] account and a trading account. To open both accounts, you are required to come over to brokerage firms’ office to fill up the relevant forms or you can reach out to your remisiers and they will assist in this account opening process.[4]

After the processes are completed, you may start transferring your money into your trust account. Set your investment goals and strategies, and finally start your investment transaction.

You can engage a licensed Dealer’s Representative (Remisier) whenever you want to transact in shares. You can also transact in shares on your own via online.

For example for stock market in Malaysia, there are many firms offer brokerage accounts that can be managed online. If you prefer buying and selling stocks online, you can use sites like BIMB Securities, itradecimb, KenTrade or HLeBroking. These are four out of many of the most well-known electronic brokerages, but many large firms have online options as well.

Fundamental Analysis and Technical Analysis

Before discussing on the art of charting from Islamic point of view, it is worth mentioning that there are two types of chart analysis technique that most commonly have been practiced, namely fundamental analysis and technical analysis.

According to Investopedia, fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security’s current price, thus indicating whether the security is undervalued or overvalued.[5]

Technical analysis is a trading tool employed to evaluate securities and attempt to forecast their future movement by analysing statistics gathered from trading activity, such as price movement and volume. Unlike fundamental analysts who attempt to evaluate a security’s intrinsic value, technical analysts focus on charts of price movement and various analytical tools to evaluate a security’s strength or weakness and forecast future price changes.[6]

In technical analysis practice, many indicators can be used like trend lines, Moving Average (MA), Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), Stochastic, Momentum, Williams’ Percentage Retracement, Directional Movement Index, Commodity Channel Index, Volume, Bollinger Bands and Elliot Wave Theory. These are among Western indicators suggested by Fred K. H. Tam in his book; The Power of Japanese Candlestick Charts.[7]

These indicators are a valuable trading tool and very significant as the profitability improves when used simultaneously. It means that the more technical indicators that confirm each other, the better the chance of an accurate forecast. The logic behind this rule is that if individual time-proven techniques tend to be right most of the time, a combination of several such techniques that confirm each other will tend to be right even more frequently.”[8]

In short, fundamental analysis helps to decide the strength of a company and its shares whereas technical analysis will help in selecting the right time to buy or sell one company stock so that we transact the stock at the right price of a good company.

The Art of Charting from Islamic Point of View

Traders[9] will make decisions to enter the market (buying or selling) after applying stock charting and predicting the stock price movement carefully, based on technical indicators and techniques. By doing this, they aim to minimise risks and maximise profit.

From Islamic point of view, the trading is permissible provided that traders share in profit and loss, that they receive no riba, and that they do not invest in a business that is prohibited by Islamic law.

In order to gain profit, both parties usually use a trading contract. For that purpose, they must observe the pillars and conditions of trading. In summary, there are three basic pillars that must be adhered to; there must be parties involved, subject matter is recognised and mutual agreement (‘aqad).

Among the conditions of the subject matter are it must be exist, recognised to possess value, owned by the buyer or seller and the ability to deliver by the owner. All these conditions are completely executed in stock trading activities.

One issue may arise when the buying and selling activities of stocks are merely based on price movements. It seems like gambling where the transaction is totally based on charts, numbers and figures. We may ask someone, are you investing, trading or gambling?[10]

To say the transaction is invalid may inaccurate as it adheres to the pillars and conditions of trading. Potential buyers will be able to identify and buy stocks they choose. The same goes to the sellers as they are free to sell stocks they own, if they want to.

Thus we would suggest and recommend for a person who wants to invest in stocks market to apply both; fundamental and technical techniques. Fundamental techniques will tell us what stock to buy. While technical techniques will tell us when is the right time to enter or exit the market. By applying this, he or she will also indirectly fulfil conditions of subject matter and ‘aqad in trading which are: knowing the details of the product and the contract is understood by all parties involved.

We also would like to propose a follow-up research on how long should someone hold his or her portfolio in order to avoid involving in gambling and syuhbah (suspicion) elements. We would be pleased if anyone would like to share ideas or inputs for the problem statement.

Finally, we would end this article by quoting a verse in the Noble Qur’an, Allah says: “But seek, through that which Allah has given you, the home of the Hereafter; and [yet], do not forget your share of the world. And do good as Allah has done good to you. And desire not corruption in the land. Indeed, Allah does not like corrupters.”[11]

Wallahua’lam.

[1] Virginia B. Morris in collaboration with Monem A. Salam, A Muslim’s Guide to Investing & Personal Finance (New York: LightBulb Press, 2008), p. 30.

[2] The Wall Street Journal, How to Buy a Stock, http://guides.wsj.com/personal-finance/investing/how-to-buy-a-stock/, viewed on 30 August 2016.

[3] CDS is an acronym for “Central Depository System”. The Central Depository System is a system that is fully owned and operated by Bursa Malaysia Depository Sdn Bhd (formerly known as Malaysian Central Depository Sdn Bhd), a wholly owned subsidiary of Bursa Malaysia Berhad.

[4] BIMB Securities Sdn Bhd, How to transact in shares?,http://www.bimbsec.com.my/how_to_transact_in_share.php, viewed on 30 August 2016.

[5] Investopedia, Fundamental Analysis,http://www.investopedia.com/terms/f/fundamentalanalysis.asp, viewed on 30 August 2016.

[6] Ibid., Technical Analysis, http://www.investopedia.com/terms/t/technicalanalysis.asp, viewed on 30 August 2016.

[7] Fred K. H. Tam., The Power of Japanese Candlestick Charts (Singapore: Wiley, 2001), pp. 215-245.

[8] Arthur Sklarew, Techniques of a Professional Commodity Chart Analyst (New York: Commodity Research Bureau, INC., 1980), p. 4.

[9] We would prefer using ‘trader’ instead of ‘investor’, to refer to person who practices buying and selling stocks based on technical analysis.

[10] For more info, please visit http://www.investopedia.com/articles/basics/10/investing-or-gambling.asp.

[11] al-Qasas 28:77